Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 1 March 2019–29 February 2020

Annual Report

HC 381

Bank of England Asset Purchase Facility Fund LimitedAnnual Report and Accounts1 March 2019–29 February 2020

Presented to Parliament pursuant to section 7C(7) of the Bank of England Act 1998 by the Chief Secretary to the Treasury.

Ordered by the House of Commons to be printed on 18 June 2020.

HC 381

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ISBN 978-1-5286-1930-1

CCS0320342808 06/20

Printed on paper containing 100% recycled fibre content

Printed in the United Kingdom on behalf of the Controller of Her Majesty’s Stationery Office

Directors’ Report 4

Strategic Report 8

Certificate and Report of the Comptroller and Auditor General 10Statement of comprehensive income 12Statement of financial position 13Statement of changes in equity 14Statement of cash flows 15Notes to the financial statements 16

Contents

4 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

Directors’ Report for the year ended29 February 2020

The Directors present their report and the audited financial statements of Bank of England Asset Purchase Facility Fund Limited (‘the Company’) for the year ended 29 February 2020.

Business review and principal activity

The Company was established as a wholly-owned subsidiary of the Bank of England (‘the Bank’) on 30 January 2009 in order to fulfil the remit of the Chancellor of the Exchequer given to the Bank on 19 January 2009(1) and detailed in an exchange of letters with the Governor of the Bank on 29 January 2009. This remit was subsequently expanded to enable the Company’s operations to be used as a monetary policy instrument, at the request of the Monetary Policy Committee (MPC) of the Bank, as detailed in the exchange of letters on 17 February 2009 and 3 March 2009. The exchange of letters can be found on the Bank and Her Majesty’s Treasury (HM Treasury) websites.(2) The Company continues to act under this remit.

On 21 June 2018, the MPC reviewed its previous guidance on the level of Bank Rate at which the MPC will consider whether to start to reduce the stock of assets purchased by the Company. The MPC continues to expect to maintain the stock of purchased assets until Bank Rate reaches a level from which it can be cut materially, reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy. The MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5%, compared to the previous guidance of around 2%. Any reduction in the stock of purchased assets will be conducted at a gradual and predictable pace. On 2 August 2017, the MPC stated that it expected the Company to reinvest cash flows associated with any reduction in the stock(3) of Corporate Bond Purchase Scheme (CBPS) assets back into eligible corporate bonds. That would take place once the required reinvestment had reached a sufficient size to allow an auction programme to be conducted. The first reinvestment programme commenced during the year.

The Company is fully indemnified by HM Treasury: that is, any financial losses as a result of the asset purchases are borne by HM Treasury, and any gains are owed to HM Treasury. Initially, it was envisaged that payments due under the Indemnity would be settled when the asset purchase scheme ended. But as the scale and likely duration of the scheme increased, on 9 November 2012(4) it was agreed that the Company would transfer the expected cash balance at 31 March 2013 as partial settlement of the Indemnity to HM Treasury over a nine-month period, commencing January 2013. The total amount transferred under this arrangement was £34.7 billion.

A process was also established for quarterly cash transfers for cash accumulated from 1 April 2013. The first of these payments was made on 26 July 2013 and the total amount transferred under this arrangement was £64.1 billion as at 29 February 2020. The quarterly cash transfer arrangement applies to both transfers from the Company to HM Treasury, and from HM Treasury to the Company should cash shortfalls in the Company arise at some point in the future.(5)

This arrangement has allowed the Government to manage its cash more efficiently in line with standard cash management processes, and is also in line with the practices of the US Federal Reserve and the Bank of Japan.

On 21 June 2018, the Bank and HM Treasury agreed a new capital and income framework for the Bank, summarised in a Memorandum of Understanding on the Financial Relationship between HM Treasury and the Bank.(6)

As part of the new capital and income framework the Term Funding Scheme (TFS) assets held by the Company were transferred to the Bank in January 2019. It was agreed that the Company would continue to receive those scheme fees above Bank Rate payable on balances outstanding at the date of transfer.(7)

The Company has no branches outside the United Kingdom.

Events after the reporting period

The COVID-19 pandemic has driven a deteriorating global economic outlook, resulting in significant uncertainty culminating in asset volatility. As the pandemic develops, the Company continues to monitor emerging risks to its operations through the Bank’s risk management framework.

In response to the pandemic, at its special meeting on 19 March 2020, the MPC voted to approve the proposition that the Bank of England should, as soon as was operationally possible and consistent with improved market functioning, increase the stock of asset purchases, financed by the issuance of central bank reserves, by £200 billion to a total of £645 billion. The company began purchases on 25 March 2020.

(1) The Chancellor’s statement is available at http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/press_05_09.htm.

(2) The exchange of letters is available at www.bankofengland.co.uk/letter/2009/apf-letter-march-2009 and http://webarchive.nationalarchives.gov.uk/20100408190827/http://www.hm-treasury.gov.uk/d/chxletter_boe050309.pdf.

(3) There are a number of factors that could result in a reduction of stock, such as redemptions, mandatory or voluntary corporate actions, a material change in an issuer’s risk profile and/or a material change in the eligibility of a given issuer.

(4) https://www.gov.uk/government/publications/asset-purchase-facility-cash-management-operations.

(5) See Mclaren, N and Smith, T (2013), ‘The profile of cash transfers between the Asset Purchase Facility and Her Majesty’s Treasury’, Bank of England Quarterly Bulletin, 2013 Q1.

(6) www.bankofengland.co.uk/-/media/boe/files/memoranda-of-understanding/financial-relationship-between-hmt-and-the-boe-memorandum-of-understanding.pdf.

(7) These scheme fees are payable by a small proportion of institutions on account of their negative net lending over the relevant period.

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 5

Operationally the Bank of England acts as the agent of the Company for both the gilt and corporate bond purchases made pursuant to its Asset Purchase Facility (APF) operations. The Bank enacted its business continuity plans as it managed risks from the spread of coronavirus. In particular, it prioritised actions to ensure the continued delivery of its critical functions and the health and wellbeing of its staff.

A review of the year is provided in the Strategic Report on page 8.

Directors

The Bank’s Chief Economist and Executive Director for Monetary Analysis and Research, the Executive Director for Markets, the Executive Director for Banking, Payments and Innovation, and the Chief Financial Officer were Directors of the Company during the year:

Andy HaldaneAndrew Hauser Victoria Cleland Afua Kyei (Appointed 2 August 2019)

The Directors have the benefit of an indemnity against personal civil liability granted to the Company by HM Treasury in 2009, provided that the Company is not in wilful default or reckless disregard of its obligations.

None of the Directors had a beneficial interest at any time during the financial year in the shares of the Company. As determined by the Directors, the annual report and accounts have been reviewed by the Audit and Risk Committee of the Bank.

Statement of Corporate Governance Arrangements

The Company applies corporate governance arrangements judged by the Board to be appropriate to its policy objectives and also, as applicable, those of the Bank to its operations. In drawing up and operating these arrangements the Board has drawn on inputs from a range of specific codes of practice on corporate governance, but has decided not to apply any single code in its entirety, given the many provisions of such codes that are not applicable to the Company, in light of its unique purpose and its subsidiary status. Further information on the Bank’s corporate governance arrangements including those relating to its people, risk management and internal control systems, corporate sustainability and responsibility initiatives can be found in the Bank’s Annual Report and Accounts for 2019/2020.

The Company has authorised the Bank to carry out the day to day activities and transactions relating to the asset purchase facility (the ‘APF’) on its behalf within set investment

guidelines and controls. The Board meets at least quarterly to receive and discuss financial, legal, operational and risk updates on the Company and its operations and to make decisions on those matters that it has reserved to itself. Members of the Board attend relevant parts of the Bank’s Audit and Risk Committee and a financial and risk management framework has been agreed by the Company with HM Treasury which sets out the high-level risks and standards for the Company’s investment strategy. An internal control framework, which is reviewed annually by the Board, is also in place and addresses matters such as day to day governance of the APF and decision-making, the supporting processes and resources provided by the Bank, the implementation of APF operations and risk management and controls.

Risk management

The Company’s operations are fully indemnified by HM Treasury and in return any surplus from these operations after the deduction of fees, operating costs and any tax payable are due to HM Treasury. As such, the Company is not exposed to financial risk, but manages the relevant risks on the underlying portfolio on HM Treasury’s behalf.

The Company operates within a control framework agreed with HM Treasury. Subject to the policy objectives, the aim is to minimise overall risk through the appropriate choice of portfolio and risk management practices. A set of high-level financial risk parameters is in place for the Company’s operations, relating to eligible asset classes, investment limits, credit risk, and counterparties; more detail is included in note 12 to the accounts.

Board meetings were held quarterly.

Engagement with suppliers, customers and others

All of the infrastructure and support required to carry out APF operations is either provided by the Bank, or procured by the Bank from third parties. Consequently it is the Bank rather than the Company that enters into arrangements with, and is responsible for, the day to day management of any relevant supplier relationships. The Bank depends on its suppliers to help fulfil its mission and is committed to developing its supplier relationships and building trust. It is a signatory to the Prompt Payment Code and has published a Supplier Code of Practice on its website, to which all of its suppliers are expected to adhere.

Given its role in assisting the Bank to implement the monetary policy decisions of the MPC, the Board considers the UK public to be a key stakeholder for the Company. The Bank uses a variety of communication tools including public speeches by senior officials, social media and its website to provide tailored

6 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

information to the public on the Bank’s monetary policy decisions including the operations of the APF. With this in mind, the Board approved during the current reporting period a number of changes to the description of the Company’s APF operations on the Bank’s website as well as disclosures in the Bank’s Annual Report on how the financial risks from climate change on the Company’s operations are managed.

The Bank acts as the agent of the Company for both the gilt and corporate bond purchases made pursuant to its APF operations. Counterparties to these transactions must be participants in the Bank’s Sterling Monetary Framework who are market makers in investment-grade Sterling denominated bonds and/or gilt-edged market makers. Alongside the routine day to day engagement with representatives of such entities by members of the Bank’s Markets Directorate, detailed information on how to participate in the Company’s APF schemes is provided through Market Notices and other communications made available on the Bank’s website.

The Company’s ultimate parent undertaking is HM Treasury. Officials from both the Bank and HM Treasury meet regularly to monitor the operation of the APF schemes operated by the Bank on behalf of the Company, to consider any risks to the public sector balance sheet, and to discuss the potential impacts of those schemes on specific sectors and markets.

Political contributions

The Company made no political donations and incurred no political expenditure during the year.

Dividend policy

As a result of the Indemnity agreement, all profits and losses are passed onto HM Treasury. As a result there is no specific dividend policy required.

Disclosure of information to the Auditor

The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s Auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information.

Statement of Directors’ responsibilities in respect of the Directors’ Report, Strategic Report and the financial statements

The Directors are responsible for preparing the Strategic Report, the Directors’ Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable law.

Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company at that reporting date and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• ensure internal controls are in place as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error;

• state whether they have been prepared in accordance with IFRS as adopted by the EU; and

• prepare the financial statements on the going-concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Bank of England’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm that the Annual Report and Accounts as a whole, is fair, balanced and understandable and provides the necessary information to users to assess the Company’s

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 7

position, performance, purpose and strategy. The Company’s financial statements for the period to 29 February 2020 are presented on pages 12–24.

Assessment of going concern

In making their going concern and viability assessments, the Directors have considered information relating to present and potential conditions, including cash flows and the ability of the Company to meet its liabilities as they fall due. Additionally the Company is fully indemnified by HM Treasury.

By order of the Board

A Haldane A Hauser V Cleland A Kyei Director Director Director Director 27 May 2020 27 May 2020 27 May 2020 27 May 2020

8 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

Strategic Report for the year ended 29 February 2020

Review of 2019/20

The Company continued to maintain the package of measures to support the UK economy, as voted by the Monetary Policy Committee (MPC).

The stock of gilts held by the Company remained at £435.0 billion. During the year, there were three gilt redemptions, the cash flows associated with which were reinvested in gilts. As at 29 February 2020, the total amount of gilts purchased, less redemptions, valued at initial purchase price was £435.0 billion.

As at 29 February 2020, the stock of corporate bonds held by the Company under the Corporate Bonds Purchase Scheme (CBPS), valued at initial purchase price and net of sales and redemptions was £9.8 billion (2019: £9.6 billion). This increased from the prior year following reinvestment in stock of corporate bonds. The target for corporate bond purchases remained at £10 billion.

Since the inception of the Company until 29 February 2020, total purchases of gilts and eligible corporate bonds, net of redemptions and sales, valued at initial purchase price, was £445.0 billion.

Following the implementation of the new capital and income framework for the Bank, administrative expenses incurred by the Bank in connection with the operation of the Company of up to £5 million per annum will be recovered by the Bank from income derived through the Cash Ratio Deposit (CRD) scheme, rather than charged to the Company.

Financial results

The Company’s financial statements for the year ended 29 February 2020 are provided on pages 12–24. Debt securities showed a mark-to-market gain, attributable to an increase in the market value of the Company’s gilt and corporate bond holdings. This was matched by an increase in the amount due to HM Treasury under the indemnity. Because of the Indemnity, the Company will never show an overall profit or a loss.

The balance sheet of the Company totalled £514.4 billion at 29 February 2020 (2019: £477.8 billion). The Company’s principal liability was the loan from the Bank of England of £445.3 billion (2019: £445.2 billion), the remaining liabilities represent the net amount payable to HM Treasury under the indemnity of £69.1 billion (2019: £32.6 billion) and interest expense. The fair value of the Company’s holdings of securities

was £509.7 billion (2019: £472.9 billion), of which £499.9 billion represented gilts and £9.8 billion represented corporate bonds (2019: £463.9 billion represented gilts, £9.0 billion represented corporate bonds). The Company’s cash holdings at the balance sheet date were £4.6 billion (2019: £4.9 billion), primarily representing coupon income received, net of transfers to HM Treasury.

Section 172(1) Statement

The Board acts in good faith to promote the success of the Company. It does so by ensuring that the Company achieves its primary purpose of assisting the Bank with its central banking functions, in particular its monetary policy objective, through the implementation and operation of the APF schemes. The Board is conscientious about its responsibilities and duties to its stakeholders under Section 172 of the Companies Act 2006. Information about engagement with the Company’s key stakeholders (which include the UK public, APF market counterparties, suppliers and its ultimate parent undertaking HM Treasury) can be found in the Directors’ Report. The Bank’s Annual Report for 2019/2020 also contains information on how financial risks from climate change are managed across its entire operations including those of the Company.

Principal risks and uncertainties

The Company’s operations are fully indemnified by HM Treasury and in return any surplus from these operations after the deduction of fees, operating costs and any tax payable is due to HM Treasury. As such, the Company is not exposed to financial risk, but manages the relevant risks on the underlying portfolio on HM Treasury’s behalf.

Uncertainties around reduction of stock of purchased assets remain as referenced in the Business review and principal activity section of the Directors’ Report on page 4.

The Company’s accounts do not provide a meaningful guide to the overall impact of its purchases on the public finances. The amount due to or from HM Treasury under the Indemnity does not indicate whether the public sector as a whole made a profit or loss from the Company’s asset purchases.

Further information has been published(8) on the broader impact of quantitative easing on the economy and the public finances.

(8) See Haldane, A, Roberts-Sklar, M, Wieladek, T and Young, C (2016), ‘QE: the story so far’, Bank of England Staff Working Paper No. 624; Broadbent, B (2017), www.parliament.uk/documents/commons-committees/treasury/Correspondence/Ben-Broadbent-BoE-post-2008-UK-monetary-policy-6-4-17.pdf and Bunn, P, Pugh, A and Yeates, C (2018), ‘The distributional impact of monetary policy easing in the UK between 2008 and 2014’, Bank of England Staff Working Paper No. 720.

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 9

Asset purchases affect the economy and, ultimately, inflation through a variety of channels, via households, corporates and financial markets and institutions. Purchases of government securities will also impact the economy in a slightly different manner to purchases of corporate bonds. As such, Figure 1 is a simplified and stylised representation of the transmission mechanism of asset purchases, rather than a full description.

By order of the Board

Bank of Englandasset purchases

Expectations

Asset prices(yields)

Money in the economy

Cost of borrowing

Total wealth

Bank lending

Spending andincome Target inflation

(a) www.bankofengland.co.uk/quarterly-bulletin/2009/q2/quantitative-easing.

Figure 1 Stylised transmission mechanism for asset purchases(a)

A Haldane A Hauser V Cleland A Kyei Director Director Director Director 27 May 2020 27 May 2020 27 May 2020 27 May 2020

10 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

The Certificate And Report of the Comptroller and Auditor General to the House Of Commons

Opinion on financial statementsI certify that I have audited the financial statements of Bank of England Asset Purchase Facility Fund Limited (BEAPFF) for the year ended 29 February 2020 under the Bank of England Act 1998. The financial statements comprise the Company’s Statement of Comprehensive Income, Statement of Financial Position, Statement of Cash Flows, Statement of Changes in Equity; and the related notes, including the significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the European Union.

In my opinion the financial statements:

• give a true and fair view of the state of the Company’s affairs as at 29 February 2020 and of the profit after tax for the year then ended; and

• have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; and

• have been prepared in accordance with the Companies Act 2006 and HM Treasury directions issued under the Bank of England Act 1998.

Opinion on regularityIn my opinion, in all material respects the income and expenditure recorded in the financial statements have been applied to the purposes intended by Parliament and the financial transactions recorded in the financial statements conform to the authorities which govern them.

Basis of opinionsI conducted my audit in accordance with International Standards on Auditing (ISAs) (UK) and Practice Note 10 ‘Audit of Financial Statements of Public Sector Entities in the United Kingdom’. My responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of my report. Those standards require me and my staff to comply with the Financial Reporting Council’s Revised Ethical Standard 2016. I am independent of BEAPFF in accordance with the ethical requirements that are relevant to my audit and the financial statements in the UK. My staff and I have fulfilled our other ethical responsibilities in accordance with these requirements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Conclusions relating to going concernI am required to conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material

uncertainty exists related to events or conditions that may cast significant doubt on BEAPFF’s ability to continue as a going concern for a period of at least twelve months from the date of approval of the financial statements. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern. I have nothing to report in these respects.

Responsibilities of the directors for the financial statementsAs explained more fully in the Statement of Directors’ responsibilities in respect of the Directors’ Report, Strategic Report and the financial statements, the directors are responsible for:

• the preparation of the financial statements and for being satisfied that they give a true and fair view;

• such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error;

• assessing BEAPFF’s ability to continue as a going concern, disclosing, if applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate BEAPFF or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statementsMy responsibility is to audit, certify and report on the financial statements in accordance with the Bank of England Act 1998 and International Standards on Auditing (ISAs) (UK).

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs (UK), I exercise professional judgment and maintain professional scepticism throughout the audit. I also:

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 11

• identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of BEAPFF’s internal control.

• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

In addition, I am required to obtain evidence sufficient to give reasonable assurance that the income and expenditure reported in the financial statements have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them.

Other InformationDirectors are responsible for the other information. The other information comprises information included in the Strategic Report and the Directors’ Report but does not include the financial statements and my auditor’s report thereon. My opinion on the financial statements does not cover the other information and I do not express any form of assurance conclusion thereon. In connection with my audit of the financial statements, my responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or my knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work I have performed, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard.

Opinion on other mattersIn my opinion:

• in light of the knowledge and understanding of the company and its environment obtained in the course of the audit, I have not identified any material misstatements in the Strategic Report or the Directors’ Report; and

• the information given in the Strategic and Directors’ Reports for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements.

Matters on which I report by exceptionI have nothing to report in respect of the following matters where the Companies Act 2006 requires me to report to you if, in my opinion:

• adequate accounting records have not been kept or returns adequate for my audit have not been received from branches not visited by my staff; or

• the financial statements are not in agreement with the accounting records and returns;

• certain disclosures of directors’ remuneration specified by law are not made; or

• I have not received all of the information and explanations I require for my audit.

ReportI have no observations to make on these financial statements.

Gareth Davies Comptroller and Auditor General1 June 2020

National Audit Office157–197 Buckingham Palace RoadVictoriaLondon SW1W 9SP

12 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

Statement of comprehensive income for the year to 29 February 2020

Statement of other comprehensive income for the year to 29 February 2020

There were no items of other comprehensive income during the year ended 29 February 2020 (2019: £nil).

The notes on pages 16–24 are an integral part of these financial statements.

Note 2020 £m

2019 £m

Interest received 45 30

Net gains on financial instruments 32,453 –

Coupon income received on financial instruments 14,483 14,999

Fee income received on TFS – 725

Other income – –

Total Income 46,981 15,754

Interest paid on the loan from the Bank of England (3,347) (3,575)

Net losses on financial instruments – (2,867)

Administrative expenses 4 – (2)

Net indemnity for the year due to HM Treasury 8 (43,634) (9,310)

Total Expenses (46,981) (15,754)

Profit before taxation – –

Taxation – –

Profit after tax – –

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 13

Statement of financial position as at 29 February 2020Note 2020

£m2019

£m

Assets

Cash 10 4,632 4,880

Debt securities 5 509,732 472,887

Other assets 6 31 49

Total assets 514,395 477,816

Liabilities

Loans and other borrowings 7 445,280 445,198

Due to HM Treasury under Indemnity 8 69,115 32,618

Total liabilities 514,395 477,816

Equity

Capital 9 – –

Retained earnings – –

Total equity attributable to shareholders – –

Total liabilities and equity attributable to shareholders 514,395 477,816

In accordance with section 7C(4) of the Bank of England Act 1998, the Bank of England Asset Purchase Facility Fund Limited is exempt from the requirements of Part 16 (Audit) of the Companies Act 2006.

Company number: 06806063

The financial statements were approved by the Board on 27 May 2020 and signed on its behalf by:

A Haldane A Hauser V Cleland A Kyei Director Director Director Director

The notes on pages 16–24 are an integral part of these financial statements.

14 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

Statement of changes in equity for the year to 29 February 2020

There were no changes in equity during the year. The entire capital comprising 100 ordinary shares of £1 was issued, and fully paid to the Governor and Company of the Bank of England on 30 January 2009.

The notes on pages 16–24 are an integral part of these financial statements.

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 15

Statement of cash flows for the year to 29 February 2020

Note 2020 £m

2019 £m

Cash flows from operating activities

Profit after tax and indemnity – –

Adjustments for:

Interest income (45) (30)

Interest on Bank of England loan 3,347 3,575

3,302 3,545

Changes in operating assets and liabilities

Increase/(decrease) in amount due to HM Treasury 36,497 (374)

(Increase)/decrease in value of debt securities (36,845) 901

Decrease in value of TFS loans – 127,118

(Increase)/decrease in other assets 18 (48)

Decrease in other liabilities – (1)

Cash generated from operations 2,972 131,141

Interest received 45 30

Net cash from operating activities 3,017 131,171

Cash flows from financing activities

Loans and other borrowings 82 (126,976)

Interest expense (3,347) (3,575)

Net cash from financing activities (3,265) (130,551)

Net increase/(decrease) in cash and cash equivalents 10 (248) 620

Cash and cash equivalents at 1 March 2019 10 4,880 4,260

Cash and cash equivalents at 29 February 2020 10 4,632 4,880

The notes on pages 16–24 are an integral part of these financial statements.

16 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

Notes to the financial statements

1 Basis of preparationForm of presentation of the financial statementsThe financial statements comprise the Statement of Comprehensive Income, Statement of Financial Position, the Statement of Cash Flows, Statement of Changes in Equity and related notes.

The Company’s financial statements have been prepared and approved by the Directors in accordance with the requirements of International Financial Reporting Standards (IFRS) and interpretations of International Financial Reporting Interpretations Committee, as adopted by the EU (together, ‘adopted IFRS’).

The financial statements have been prepared on a going-concern basis under the historical cost convention, as modified to include the revaluation of financial assets and liabilities that are held at fair value through profit or loss, and in accordance with the Companies Act 2006 and applicable accounting standards.

In making their going concern and viability assessments, the Directors have considered information relating to present and potential conditions, including cash flows and the ability of the Company to meet its liabilities as they fall due. Additionally the Company is fully indemnified by HM Treasury.

2 Accounting policiesThe following principal accounting policies have been applied consistently in the preparation of the financial statements.

The Company adopted the IFRS 16 Leases standard, which replaced IAS 17 Leases for the financial year beginning 1 March 2019. The Company has no leases hence the new standard does not have a material impact on the Company.

a) Functional and presentational currencyThe financial statements are presented in Sterling, which is the Company’s functional and presentational currency.

b) Financial instruments: financial assets and liabilities designated at fair value through profit or loss

i) ClassificationThe Company designates certain assets and liabilities at fair value through profit or loss to eliminate or significantly reduce the accounting mismatch that would otherwise arise from measuring financial assets and liabilities, or recognising gains or losses on them in the profit and loss account, on different bases. Departure from this treatment would create a mismatch in the measurement of the HM Treasury indemnity financial liability (see 2(c)), the value of which equates to the difference between the fair value of the Company’s assets and liabilities. Such assets and liabilities are the TFS scheme fees, the Indemnity and loans and other borrowings.

Debt securities are designated at fair value through profit and loss in accordance with IFRS 9. The fair value designation is made on initial recognition and is irrevocable.

ii) Initial recognition of financial instrumentsFinancial instruments are initially recognised at fair value and transaction costs are immediately recognised in profit or loss. Financial securities are recognised/derecognised on the date the Company commits to purchase/sell the instrument (trade date accounting). The loan from the Bank of England is recognised on a settlement date basis.

Fair value is deemed to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

iii) Subsequent measurementGains and losses arising from changes in the fair value of assets classified at fair value through profit or loss are included in the statement of comprehensive income in the period in which they arise.

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 17

The fair values of quoted investments in active markets are based on current bid prices. In other cases, the Company establishes fair value by using appropriate valuation techniques. The policy for establishing fair values of securities in non-active markets and TFS scheme fees is described in note 3 ‘Significant accounting estimates and judgements in applying accounting policies’ below.

c) HM Treasury IndemnityThe Company’s operations are fully indemnified for loss by HM Treasury and in return any surplus from these operations, after deduction of fees, operating costs and any tax payable is due to HM Treasury. This arrangement is accounted for as a financial instrument under IFRS 9 as it contains contractual obligations and rights as regards to the transfer of cash at a future date, so meets the definition of a financial instrument per IAS 32, and the value changes in respect of the underlying assets and liabilities of the Company. As such, the Indemnity is valued on the basis of the difference between the fair value of the Company’s assets and liabilities. This is deemed to be the most appropriate accounting treatment as it provides the most accurate value of the Company as at the balance sheet reporting date.

Following the alteration to the Indemnity agreement in November 2012, a process for partial settlement of the indemnity between the Company and HM Treasury was established. The Indemnity is presented after giving effect to payments made or received.

d) Cash and cash equivalentsFor the purposes of the statement of cash flows, cash and cash equivalents comprise cash balances with less than three months’ maturity from the date of acquisition.

e) Equity capitalThe entire equity capital comprising 100 £1 ordinary shares is held by the Governor and Company of the Bank of England.

3 Significant accounting estimates and judgements in applying accounting policiesThe Company makes estimates and assumptions that affect the reported amounts of assets within the financial statements. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Fair value of Term Funding Scheme (TFS) feesAs part of the transfer of TFS loans to the Bank on 21 January 2019, the nominal value of the loans was de-recognised from the Statement of Financial Position in a prior year having met the criteria per IFRS 9. Ahead of the transfer of these assets, it was agreed that the Company would continue to receive any scheme fees, being those additional scheme fees above Bank Rate payable on balances outstanding at the date of transfer. As such these scheme fees remained on the Company Statement of Financial Position and are included in other assets.

Fair value in non-active marketsWhere possible, the Company uses a market price to value securities, as at 29 February 2020 this applies to the Company’s entire portfolio of debt securities (see note 5). In other cases, the Company establishes fair value by using appropriate valuation techniques (see note 12). Loans and other borrowings are held at fair value. In relation to the Indemnity, the instrument is valued on the basis of the difference between the fair value of the Company’s assets and liabilities which is the amount due under the HM Treasury indemnity.

4 Administrative expenses

2020 £m

2019 £m

Management fee payable to Bank of England – 2

18 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

Until May 2018, the Bank met all of the costs of the Company, including staff costs, and recharged them in full to the Company. Following the implementation of the new Cash Ratio Deposit (CRD) regime, costs of up to £5 million per annum (effective from 1 June 2018) are recovered by the Bank from CRD income.

Under this arrangement the Bank recovered £4 million (2019: £4 million) through the CRD scheme and recovered £nil (2019: £2 million) from the Company. The total administrative expense for the year was £4 million (2019: £6 million).

The Directors have not received any emoluments in respect of their services to the Company during the year ended 29 February 2020 (2019: £nil).

Fees in relation to audit services fees are paid for by the Bank and recharged to the Company through a management fee except where they are recovered by the Bank via the CRD scheme.

5 Debt securities

As at 29 February 2020 gilts with a fair value of £1.5 billion were lent to the Debt Management Office (2019: £3.9 billion) (see note 14).

The Corporate Bond Purchase Scheme (CBPS) was set up to purchase high-quality private sector assets financed by the creation of central bank reserves. The CBPS may buy up to £10 billion worth of sterling-denominated bonds issued by companies (including their finance subsidiaries) where the Company makes a material contribution to economic activity in the United Kingdom.

The Company considers a number of factors in making its eligibility decisions. Companies with significant employment in the United Kingdom or with their headquarters in the United Kingdom will normally be regarded as meeting this requirement, but the Company will also consider whether the company generates significant revenues in the United Kingdom, serves a large number of customers in the United Kingdom or has a number of operating sites in the United Kingdom.

6 Other assets

2020 £m

2019 £m

Accrued interest 3 2

TFS scheme fee asset 28 47

Total other assets 31 49

2020 £000

2019 £000

Audit fees

Fees relating to current year 38 35

Fees payable for other services

Other fees – –

2020 £m

2019 £m

Gilts 499,884 463,905

Corporate bonds 9,848 8,982

Total debt securities 509,732 472,887

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 19

The Bank and the Company signed a separate agreement on 18 January 2019 setting out the transfer of the TFS scheme fees (an additional fee over Bank Rate applied to 8 out of the 62 participants) from the Bank to the Company following the TFS transfer.

These scheme fees have been recognised at fair value in accordance with IFRS 9 (see note 2b(i)) and valued using present value methodology (note 3).

7 Loans and other borrowings

2020 £m

2019 £m

Total loan from Bank of England 445,280 445,198

The Company will commence full or partial repayment of the loan from the Bank of England at such time as the Bank’s MPC votes to begin an unwind of the quantitative easing programme. Interest charges on the loan are accrued and paid to the Bank on each scheduled MPC meeting date.

8 Due to HM Treasury under Indemnity

2020 £m

2019 £m

Net due to HM Treasury under indemnity 1 March 32,618 32,992

Change in fair value of indemnity 43,634 9,310

Cash paid to HM Treasury (7,137) (9,684)

Net due to HM Treasury under indemnity 29 February 69,115 32,618

An Indemnity has been provided by HM Treasury against any loss incurred by the Company and any profit made by the Company will be passed to HM Treasury. The Indemnity is valued on a mark-to-market basis (see note 2(c)).

9 CapitalThe Company is a private company limited by shares.

The entire capital comprising of 100 authorised, issued and fully paid ordinary shares of £1 is held by the Governor and Company of the Bank of England.

In view of the Indemnity from HM Treasury, the Company requires only nominal capital.

10 Cash and cash equivalents

As at 28 February 2019

£m

Cash flow

£m

As at 29 February 2020

£m

Cash 4,880 (248) 4,632

11 Contingent liabilitiesThere were no contingent liabilities as at 29 February 2020 (2019: £nil).

12 Financial risk managementThe Company’s operations are fully indemnified for loss by HM Treasury, and any surplus/deficit for these operations after deduction of fees, operating costs and any tax payable is due to/from HM Treasury. As such, the Company is not exposed to financial risk, but manages credit risk and monitors market risk on HM Treasury’s behalf. Financial risk management is carried out by the Bank on behalf of the Company.

20 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

The governance arrangements to manage and monitor these risks are described in a control framework document (which sets out the controls and procedures for undertaking transactions, monitoring risk, accounting and making payments), reviewed and approved periodically by the Directors. There is also a set of high-level risk standards applying to the Company agreed between HM Treasury and the Bank.

The Directors seek to ensure that effective risk management processes exist for monitoring and managing risk, within clear risk policies. Specialist teams and committees support senior management in ensuring that agreed standards and policies are followed.

The Bank’s Financial Risk Management Division (FRMD) is responsible for analysing the financial risks faced by the Company in its operations in financial markets.

The Bank’s Financial Risk and Resilience Division (FRRD) is responsible for challenge of risk decisions and risk management frameworks.

The Bank’s Middle Office is responsible for the pricing, valuation and financial control of exposures and collateral positions arising from the Company’s market operations, including counterparty and instrument management.

a) Credit riskCredit risk is the risk of loss arising from the failure of a counterparty or issuer to meet its financial obligations to the Company. Credit risk in the Company’s asset portfolio arises as a result of purchasing debt security instruments issued by the UK Government and investment-grade companies.

The Company’s credit risk policies are those defined by the Bank within the arrangements agreed with HM Treasury. The Bank defines high-level credit risk parameters under which credit risk is monitored and controlled. Credit exposures to companies are controlled by a system of limits. Credit assessments are performed on all market counterparties, issuers and customers to whom the Company is exposed. These are performed both regularly, following a timetable that reflects the risk of the actual or potential exposure, and dynamically, in response to market or specific entity conditions.

The Bank’s internal committees, chaired by the Head of Financial Risk Management Division, review the creditworthiness of issuers, counterparties and customers to whom the Bank and Company may have credit exposures. The Bank’s internal committees are supported by a credit risk analysis team.

The table below represents an analysis of debt securities by credit risk groupings, based on external rating agency designation(9) at 29 February 2020 with prior year comparatives:

Credit risk groupings of debt securities

2020 £m

2019 £m

AAA 149 47

AA 500,701 464,472

A 2,767 2,682

BBB 6,065 5,727

Not quoted 50 6

Total 509,732 472,934

(9) Analysis of external credit ratings as at 29 February 2020 of the Company’s debt securities by credit risk groupings, these ratings are based on the average of several market providers.

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 21

The table below shows the geographical concentration of the Company’s financial assets:

Location — Geographical concentration of assets

2020 £m

2019 £m

United Kingdom 506,017 469,466

Rest of Europe 2,630 2,444

Other 1,085 1,024

Total 509,732 472,934

Assets categorised outside of the United Kingdom are held in the CBPS scheme and meet the required eligibility criteria. See note 5 for additional information on CBPS eligibility criteria.

Under the CBPS the Company has looked to ensure purchases are representative of eligible issuance at a sector level, in order to impart broader economic stimulus by lowering the yields on corporate bonds, thereby reducing the cost of borrowing for companies directly. It was also expected to induce the sellers of corporate bonds to replace those assets with other risky assets, and ultimately lead to a general rebalancing of investors’ portfolios, and it was expected to stimulate new issuance of sterling corporate bonds. The Company has established an internal framework to aid portfolio diversification among corporate sectors, single name issuers and issuance. The table below shows the sector concentration of these assets:

Corporate bonds — Sectoral concentration of assets

2020 2019

£m Per cent £m Per cent

Communications 1,107 11 1,097 12

Consumer, cyclical 1,051 11 884 10

Consumer, non-cyclical 1,614 16 1,426 16

Electricity 1,997 20 1,931 21

Energy 269 3 213 3

Gas 744 8 705 8

Industrial and transport 1,202 12 1,179 13

Property and finance 570 6 459 5

Water 1,294 13 1,088 12

Total 9,848 100 8,982 100

b) Market riskMarket risk is defined as the risk of losses arising from movements in market prices. Market risk in the Company’s asset portfolio arises as a natural consequence of its policy objectives, principally through the repricing of its assets as a result of changes in market interest rates.

The Company monitors interest rate risk in the form of ‘delta’, which is the change in valuation from a 1 basis point increase in market interest rates. The delta at 29 February 2020 was £543.5 million (2019: £451.4 million).

The Company also undertakes stress tests on the Company’s operations, the results of which are reported to management alongside the delta measure.

c) Liquidity riskLiquidity risk is the risk of encountering difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Company does not face liquidity risk. Upon receipt of notification of the Company’s intention to draw down under the loan, the Bank of England is required to make the advance, provided that the request is within authorised limits. The loan is ultimately repayable on termination of the Company’s operations.

22 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

d) Other financial riskThe Company has a £445.3 billion (2019: £445.2 billion) loan from the Bank. A 1 basis point increase in Bank Rate would increase the funding cost by £44.5 million (2019: £44.5 million) per annum.

e) Fair valueThe table below shows financial instruments carried at fair value by valuation method.

As at 29 February 2020

Note Level 1 £m

Level 2 £m

Total £m

Assets

Debt securities 5 509,732 – 509,732

TFS scheme fee asset 6 – 28 28

Liabilities

Loans and borrowings 7 – 445,280 445,280

Due to HM Treasury under indemnity 8 – 69,115 69,115

As at 28 February 2019

Note Level 1 £m

Level 2 £m

Total £m

Assets

Debt securities 5 472,887 – 472,887

TFS scheme fee asset 6 – 47 47

Liabilities

Loans and borrowings 7 – 445,198 445,198

Due to HM Treasury under indemnity 8 – 32,618 32,618

There have been no transfers between levels in the year.

Level 1: Valuation techniques using quoted market prices: debt securities are valued using unadjusted quoted prices in active markets for identical financial instruments.

Level 2: Valuation techniques using observable inputs: financial instruments with quoted prices and models where inputs are observable. The categories of instruments comprise: the Indemnity to/(from) HM Treasury (calculated as the difference between the fair value of the assets and liabilities of the Company), the loan from the Bank to the Company and TFS scheme fees.

The balance sheet carrying value of cash, other assets and other liabilities approximates to the fair value.

f) Maturity analysisMaturities of debt securities at their carrying amount as at 29 February 2020

Note Up to 1 year £m

1–5 years £m

5–10 years £m

Over 10 years £m

Total £m

Assets

Gilts 5 35,051 95,452 105,351 264,030 499,884

Corporate bonds 5 188 2,265 3,168 4,227 9,848

Total assets 35,239 97,717 108,519 268,257 509,732

Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20 23

Maturities of debt securities at their carrying amount as at 28 February 2019

Note Up to 1 year £m

1–5 years £m

5–10 years £m

Over 10 years £m

Total £m

Assets

Gilts 5 35,981 114,907 97,778 215,239 463,905

Corporate bonds 5 270 1,935 2,508 4,269 8,982

Total assets 36,251 116,842 100,286 219,508 472,887

13 CollateralAt 29 February 2020 the Company held securities with a fair value of £1.5 billion (2019: £3.9 billion) as collateral for gilts lent by the Company to the Debt Management Office through the Debt Management Account with a notional value of £0.4 billion (2019: £2.1 billion). This lending is performed as part of the normal course of business of the Company and within the agreed scheme framework.

The Company has not sold any of these assets to third parties but, subject to applicable law and regulations, is entitled to do so.

14 Related party transactionsThe Company has related party transactions with its shareholder, the Bank of England, and other related parties.

The Bank of EnglandAs at 29 February 2020 the Company had borrowed £445.3 billion (2019: £445.2 billion) from the Bank. Interest on this loan amounted to £3.3 billion (2019: £3.6 billion).

The Company was charged an administrative fee of £nil (2019: £2 million) by the Bank. Following the implementation of the new Cash Ratio Deposit (CRD) regime in June 2018, costs of up to £5 million per annum will be recovered from CRD income. Under this arrangement the Bank recovered £4 million (2019: £4 million) through the CRD scheme. The total administrative expense for the year was £4 million (2019: £6 million). During the year, on behalf of the Company, the Bank collected and paid over £19 million in TFS penalty fees, reducing the TFS scheme asset from £47 million to £28 million (note 6).

HM TreasuryHM Treasury has indemnified the Company against any losses it may incur in connection with its operations. Any surplus from these operations after the deduction of fees and any tax payable is due to HM Treasury. During the year £7.1 billion (2019: £9.7 billion) was transferred to HM Treasury as partial settlement of the indemnity in accordance with the altered Indemnity agreement (see note 2(c) and note 8).

Debt Management Office (DMO) and Debt Management Account (DMA)During the year the Company lent overnight a small proportion of its gilts portfolio to the DMO through the DMA. The position at 29 February 2020 is shown in note 5.

Other related partiesAs part of the asset purchase scheme, the Company has purchased assets in a competitive process from commercial banks in their capacity as market makers. At the point of the transaction some of those commercial banks could be in the ownership of the UK government. These transactions were conducted in the ordinary course of the Company’s business on terms comparable to those with other entities that were not government-related.

Key managementThe Directors of the Company are considered to be the only key personnel as defined by IAS 24. The Directors have not received any emoluments in respect of their services to the Company during the year ended 29 February 2020 (2019: £nil) or entered into any other transactions with the Company.

15 Ultimate parent undertakingThe ultimate parent undertaking of the Company is HM Treasury.

24 Bank of England Asset Purchase Facility Fund Limited Annual Report and Accounts 2019–20

16 Events after the reporting period endAt its special meeting on 19 March 2020 the MPC voted to approve the proposition that the Bank of England should, as soon as was operationally possible and consistent with improved market functioning, increase the stock of asset purchases, financed by the issuance of central bank reserves, by £200 billion to a total of £645 billion. The company began purchases on 25 March 2020.

17 Preparation of accountsThe accounts were approved by the Board for distribution on 1 June 2020.

Bank of England Asset Purchase Facility Fund Limited8 LothburyLondon EC2R 8AH

Incorporated in England and Wales with limited liability underthe UK Companies ActCompany Number: 06806063

Printed by Park Communications Limited

CCS0320342808 ISBN 978-1-5286-1930-1